Investing in a commercial fleet for your small business is a lot like buying your first car. If you choose not to lease the fleet (and maybe you should if the dealer will throw in perks like prepaid maintenance and a generous billing plan), then the cost to buy will likely be substantial. For those using a loan to finance it, here are some important things to consider.
A commercial auto loan is specifically used to purchase vehicles for business purposes, such as a commercial truck, a semi-truck, or a passenger vehicle, to increase working capital or cash flow. A small business owner can get commercial vehicle financing from the bank, credit unions, or alternative lenders specializing in commercial truck financing, semi-truck financing, or other types of specialty vehicles.
A business auto loan is similar to a small business loan in terms of requirements. Both have a business purpose. To see if a customer is eligible for a business vehicle loan, lenders may ask for the following documents:
The terms of a business auto loan typically vary from one to five years. Before taking out a commercial vehicle loan, you may also want to take into consideration:
Even though having a good credit score is essential to get a commercial truck with a lower interest rate, alternative lenders also consider other factors, such as the business's earnings and cash flow. If your business generates high revenue, there is a high chance that the lender will work with you, regardless of your credit score. Bad credit score holders might end up paying higher interest or securing their commercial truck loan with collateral.
Small business owners who want to get a business auto loan can also apply for equipment financing. An equipment loan helps businesses finance construction equipment, similar to truck loans. In some cases, the term for equipment financing is up to 10 years, and the financing requirements can be similar to a business auto loan.
If a bad credit score stands in the way for you to get equipment financing or a business auto loan, you may want to consider leasing. Leasing can help you address your business's needs and may build your credit at the same time. At the end of the leasing term, business owners return the vehicle to the owner.
It's generally cheaper to use specialized funding. However, it's hard to find specially designed loan products. If you are not careful while requesting fleet vehicle financing online, you may end up with a different loan product altogether.
Financing a fleet of vehicles may be possible with traditional small business funding. Just know that you will likely pay more in interest and fees for going this route.
Before you request funding, be sure to check off the following steps:
1. Boost Your Business Credit Score
When you apply for funding, one of the first things the lender will look at is your business credit score. If it's too low, the lender may decline you outright. The higher you get it, the more likely it will be that you get a great rate. For these reasons, it makes sense to boost your business credit score before you apply for funding.
Here are some tips on how to build up your business credit score.
2. Independently Determine Your Business Credit Score
When you rely on a lender to tell you your credit score, you give all the power to the person who's deciding how much interest to charge you. It's better to get the data independently. Then you will be in a better position to negotiate the interest rate with the lender.
Remember this - many businesses assume their credit score is lower than it is. When you see the numbers yourself, you might have greater confidence to go after a better interest rate.
3. Haggle and Figure Out How Much You Need
You wouldn't pay sticker price if you were car shopping for yourself, so be ready to haggle for your fleet, too.
Before the negotiation begins, it helps to have a number already in mind. Do some research and figure out what the invoice price is for each car. When you buy a fleet, you should be saving about 10 percent under invoice on each vehicle. To save time, give that number to the dealer from the start.
4. Decide Between Direct Lending and Dealership Financing
Direct lending is when you work with a loan provider one-on-one, whether that lender is a bank, credit union, or another type of financing company. By using this kind of credit, you can compare rates as you shop around for a loan.
Another way to get fleet vehicle financing is through dealership financing. Here, you and the dealer hammer out the loan agreement. The dealer then might sell the loan to a bank, credit union, or finance company.
There are two possible benefits of financing a fleet of vehicles. First, it's convenient. Then, the dealership may offer you a special rate that's lower than what you would have been able to get by dealing with the lender directly.
Shop around. When deciding between these two financing options, it helps to know the rates. It would be best to consider taking advantage of cash rebates rather than a lower interest rate, as sometimes the dealership will make you choose between the two.
Even if you're sure you'll use small business vehicle financing, it helps to show up with another commercial vehicle loan option in hand, as this will give you solid footing during negotiations. The dealer may feel pressure to beat the rate you already have.
5. Don't Let the Dealer Focus on Monthly Payments
Car dealers are sneaky, and they'll try to hone in on the monthly payment of your fleet. A relatively small monthly payment is a bad deal if the loan term is too long. It might be better to pay more each month for a shorter loan term.
Always keep your eyes fixed on the overall cost. If the dealer tries to shift the discussion to monthly payments (by asking a question like "How much can you afford each month?"), then be ready to bring the focus back to the total cost of the fleet.
6. Look Out for Unnecessary Add-Ons
Something like 40 percent of the profits earned by car dealerships come from aftermarket add-ons. Think: paint sealant. If you're purchasing a fleet, you shouldn't have to deal with these kinds of charges. Seek out necessary add-ons outside of the dealership where they will likely be cheaper.
To ensure the dealer didn't sneak any extra charges into your bill, you'll need to comb through the paperwork. Examine every charge. If you're unsure about a part of the bill, don't sign until you understand it.
7. Study Federal and State Laws
There's legislation designed to protect you when purchasing a vehicle. One example is the Truth in Lending Act, which says that your creditor must disclose the APR of your loan, payment due dates, and late payment charges. The more knowledgeable you are about these rules, the harder it will be for a wheedling dealer to take advantage of you.
All the tips we just shared have to do with the loan itself, but you should also be aware of some fleet-specific tips to make the shopping process go more smoothly.
Convenience comes from a dealership with a dedicated fleet department. But you might end up paying for it. That's why you shouldn't discriminate as you shop around. Make sure you get all bids in writing.
Established companies will have an easier time finding a business loan for a commercial vehicle. Business auto loans, in general, are more favorable for companies with an established credit history. Startups will face an uphill battle when searching for a business car loan, especially if the company has not been profitable for the last few months.
As the rubber hits the road and you get closer to the finish line, we hope these tips will help you navigate through the complex world of fleet vehicle financing.